Posted

August 01, 2010 12:00:00 AM

Date

2010-04

Author

Ansgar Belke

Affiliation

University of Duisburg-Essen, DIW Berlin and IZA Bonn

Title

How Much Fiscal Backing Must the ECB Have? The Euro Area Is Not the Philippines

Summary /
Abstract

The ECB has accepted increasing amounts of rubbish collateral since the crisis started leading to exposure to serious private sector credit risk (i.e. default risk) on its collateralised lending and reverse operations ("repo"). This has led some commentators to argue that the ECB needs "fiscal back-up" to cover any potential losses to be able to continue pursuing price stability. This Brief argues that fiscal backing is not necessary for the ECB for three reasons. Firstly, the ECB balance sheet risk is small compared to the FED and BoE as it neither increased its quasi-fiscal operations as much as the Fed or the BoE nor did it engage to a very large extent in outright bond purchases during the financial crisis. Secondly, the ECB's specific accounting principles of repo operations provide for more clarity and earlier recognition of losses. Thirdly, the ECB can draw on substantial reserves of the euro area national banks.

Keywords

Central bank independence, central bank capital, counterparty risk, repurchase agreements, collateral, fiscal backing, liquidity, haircuts

Remarks

This is a briefing paper prepared for presentation at the Committee on Economic and Monetary Affairs of the European Parliament for the quarterly dialogue with the President of the European Central Bank, Brussels, March 2010. I find the title arrogant and insulting. The author's main thesis--that the ECB is immune from fiscal dominance--is not even true, in light of the recent crisis in Greece and the further potential threats to the euro posed by fiscal problems in Spain and Portugal.

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